Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
California Bond Fund 4
California Money Market Fund 10
Financial Information:
Independent Auditors' Report 13
Statements of Assets and Liabilities 14
Portfolios of Investments in Securities:
California Bond Fund 16
California Money Market Fund 20
Notes to Portfolios of Investments 24
Statements of Operations 25
Statements of Changes in Net Assets 26
Notes to Financial Statements 27
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "sreamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Funds.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report
per registered account owner, you may request this in writing to: USAA
Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA California
Funds, managed by USAA Investment Management Company (IMCO). It may be used as
sales literature only when preceded or accompanied by a current prospectus which
gives further details about the funds.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright) 1997, USAA. All rights reserved.
<TABLE>
USAA Family of Funds Performance Summary
If you own only one or two USAA funds, you may not be aware of the performance
of our other funds. This summary is a snapshot of the performance of all 33
funds by investment objective as of March 31, 1997.
<CAPTION>
Average Annual Total Return(%)*
Investment Inception Since
Objective Date 1 yr 5 yrs 10 yrs Inception
<S> <C> <C> <C> <C> <C>
Capital Appreciation
========================================================================================================
Aggressive Growth 10/19/81 -5.70 11.02 8.98 -
Emerging Markets(1) 11/7/94 12.86 - - 8.14
Gold(1) 8/15/84 -24.30 6.19 -4.11 -
Growth 4/5/71 10.96 14.37 10.98 -
Growth & Income 6/1/93 17.96 - - 15.82
International(1) 7/11/88 15.64 14.34 - 10.77
S&P 500 Index(4) 5/1/96 - - - 19.78+
World Growth(1) 10/1/92 14.38 - - 13.53
Asset Allocation
==================
Balanced Strategy(1) 9/1/95 12.87 - - 11.35
Cornerstone Strategy(1) 8/15/84 13.36 13.32 8.63 -
Growth and Tax Strategy(2)** 1/11/89 8.57 10.08 - 9.71
Growth Strategy(1) 9/1/95 11.02 - - 16.09
Income Strategy 9/1/95 7.17 - - 7.36
Income-Taxable
================
GNMA 2/1/91 5.59 6.94 - 7.35
Income 3/4/74 4.53 7.49 8.79 -
Income Stock 5/4/87 14.01 13.16 - 12.49
Short-Term Bond 6/1/93 6.73 - - 5.45
Income - Tax Exempt
=====================
Long-Term(2)** 3/19/82 6.51 6.80 7.04 -
Intermediate-Term(2)** 3/19/82 5.80 6.82 6.92 -
Short-Term(2)** 3/19/82 4.70 4.85 5.38 -
California Bond(2)** 8/1/89 6.60 7.06 - 7.32
Florida Tax-Free Income(2)** 10/1/93 6.51 - - 3.45
New York Bond(2)** 10/15/90 5.89 6.60 - 8.03
Texas Tax-Free Income(2)** 8/1/94 7.06 - - 8.32
Virginia Bond(2)a** 10/15/90 5.82 7.01 - 7.80
Money Market
==============
Money Market(3) 2/2/81 5.21 4.41 5.82 -
Tax Exempt Money Market(2,3)** 2/6/84 3.30 3.03 4.18 -
Treasury Money Market Trust(3) 2/1/91 5.07 4.20 - 4.35
California Money Market(2,3)** 8/1/89 3.23 2.93 - 3.62
Florida Tax-Free Money Market(2,3)** 10/1/93 3.20 - - 3.01
New York Money Market(2,3)** 10/15/90 3.16 2.80 - 3.07
Texas Tax-Free Money Market(2,3)** 8/1/94 3.22 - - 3.30
Virginia Money Market(2,3)** 10/15/90 3.14 2.85 - 3.19
</TABLE>
Non-deposit investment products offered by USAA Investment Management Company
are not insured by the FDIC, are not deposits or other obligations of, or
guaranteed by, USAA Federal Savings Bank, and are subject to investment risks,
including possible loss of the principal amount invested.
For more complete information about the mutual funds managed and
distributed by USAA IMCO, including charges and expenses, please call
1-800-531-8181 for a prospectus. Read it carefully before you invest.
1 Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
2 Some income may be subject to state or local taxes or the federal alterna-
tive minimum tax.
3 An investment in a money market fund is neither insured nor guaranteed by
the U.S. government and there is no assurance that any of the funds will be
able to maintain a stable net asset value of $1 per share.
4 S&P 500(Registered Trademark) is a trademark of The McGraw-Hill Companies,
Inc., and has been licensed for use. The product is not sponsored, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no representation
regarding the advisability of investing in the product.
* Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment
has been made for taxes payable by shareholders on their reinvested dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return
and principal value of an investment will fluctuate, and an investor's
shares, when redeemed, may be worth more or less than their original cost.
** IRAs are not available for tax-exempt funds. The Growth and Tax Strategy Fund
is not available as an investment for your IRA because the majority of its
income is tax-exempt. California, Florida, New York, Texas, and Virginia
funds available to residents only.
+ Cumulative total return since inception, including account maintenance fee.
Message from the President
[Photograph of Michael J. C. Roth, CFA, President and Vice Chairman of the
Board appears here]
At the most recent USAA Strategic Planning Conference, we spent much of our
time discussing USAA's Mission and how to accomplish it in today's world. Our
Mission has three main elements:
+We want to facilitate the financial
security of those whom we serve.
+We seek to do this with highly competitive
products and services.
+In so doing, we want to be the provider of
choice to the military community.
One evening I sat down and considered each of these separately. Perhaps the most
interesting outcome was my thoughts on financial security. What does that mean
to those who make up the USAA family?
I set down these elements:
+Housing and caring for a family
+Pursuing a rewarding career
+Providing for children's educations
+Providing proper medical care
+Protecting the family against accidents and emergencies
+Providing for a comfortable retirement
+Perhaps providing comfort to aging parents
+Creating an estate plan that will serve well those who survive you
+Enjoying life
The last point struck me especially.
Financial planning almost always focuses on the very serious reasons to save and
invest. But there needs to be a balance in people's lives. Here I have learned a
valuable lesson from my wife, Jutta. She has special china and silver. However,
she has always said, "Nothing is stored away in cabinets. I use it as often as I
can. These things are meant to be enjoyed."
This philosophy meshed very well with my ideas on saving. Here too I have urged
balance. You must save for the future, but you must not strangle on that saving.
You should use plans like 401(k)s and IRAs, but you should also set something
aside for now. That means saving in accounts that are not tax-sheltered, and
that means looking at vehicles like tax-exempt bond and money market funds. They
can perform the job of controlling overall portfolio risk, just as they would in
an IRA by combining equity and taxable bond funds. In this case, they are
valuable tools in helping your after-tax return while you enjoy life, the most
pleasant outcome of financial planning.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
USAA Funds Rated 5 Stars
on Overall Performance
Five-star ratings for overall risk-adjusted performance have been awarded by
Morningstar for USAA Funds as of March 31, 1997.*
USAA Tax Exempt Intermediate-Term Fund & USAA Tax Exempt Short-Term Fund
were rated 5 Stars overall among 1,751, 1,237, 601, and 267 municipal bond
funds for the 1-,3-,5-, and 10-year periods, respectively.
USAA Growth & Income Fund was rated 5 Stars for the 3-year period and 4 Stars
for the 1-year period among 1,919 and 3,048 domestic equity funds, respectively.
USAA International Fund was rated 5 Stars for the 5-year period and 4 Stars for
the 1- and 3-year periods overall and among 219, 939, and 478 international
equity funds, respectively.
*Morningstar proprietary ratings reflect historical risk-adjusted performance
through March, 31 1997. The ratings are subject to change monthly. Past
performance is no guarantee of future results. Morningstar ratings are
calculated from the fund's 3-, 5-, and 10-year average annual total returns
(with fee adjustments) in excess of 90-day Treasury bill returns, and a risk
factor that reflects fund performance below 90-day T-bill returns. The one-year
rating is calculated using the same methodology, but is not a component of the
overall rating. Ten percent of the funds in a rating category receive five
stars and the next 22.5% receive four stars.
For more information about mutual funds managed and distributed by USAA IMCO,
including charges and expenses, please call for a prospectus. Read it carefully
before investing.
Investment Review
CALIFORNIA BOND FUND
OBJECTIVE: Provide California investors with a high level of current interest
income that is exempt from federal and California state income taxes.
TYPES OF INVESTMENTS: Invests primarily in long-term investment grade California
tax-exempt securities.
3/31/96 3/31/97
Net Assets............................ $409.2 Million $440.2 Million
Net Asset Value Per Share............. $10.43 $10.50
Average Annual Total Returns as of 3/31/97
1 Year........................................................... 6.60%
5 Years.......................................................... 7.06%
Since inception on August 1, 1989................................ 7.32%
30-Day SEC Yield* on March 31, 1997.............................. 5.49%
*Calculated as prescribed by the Securities and Exchange Commission.
A graph is shown here which is a comparison of the change in value of a $10,000
investment for the period of 8/1/89 to 3/31/97, with dividends and capital
gains reinvested. The ending values for the items graphed are:
Lehman Brothers Muni. Bond Index $17,486
USAA California Bond Fund 17,195
Lipper California Municipal Debt Funds Average 16,602
The broad-based Lehman Brothers Municipal Bond Index is an unmanaged index that
tracks total return performance for the long-term investment grade tax-exempt
bond market. The Lipper California Municipal Debt Funds Average is the average
performance level of all California Municipal Debt Funds, as computed by Lipper
Analytical Services, an independent organization that monitors the performance
of mutual funds. All tax-exempt bond funds will find it difficult to outperform
the Lehman Index, since funds have expenses.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested dividends and
capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
Message from the Manager
[A photograph of Robert R. Pariseau, CFA appears here]
The Envy of the World
Since 1983, the United States economy has enjoyed impressive, but not
spectacular, growth with steadily rising employment, relatively low inflation
and only one short recession in these 14 years. Using conventional wisdom from
the 1970's and early 1980's, an economist would expect such sustained growth to
strain production capacity and trigger higher prices. However, since 1991,
inflation has been consistently below 3.5%, as measured by the Consumer Price
Index.
Has inflation been tamed? My first boss at USAA, Harry Miller, Senior Vice
President for Equity Investments, taught me that the four most dangerous words
in investing are - "it's different this time." Fixed income investors demand
higher interest rates when the inflation rate accelerates, because their future
interest payments will have less purchasing power. Since bond prices fall when
interest rates rise, the bond market reacts negatively to the threat of higher
inflation.
What Is Different This Time?
Compared to earlier decades, quite different factors now influence the many
pieces of the economic puzzle. For example: Have computer technology and
just-in-time manufacturing increased productivity and smoothed economic cycles?
Are workers and managers too concerned about job security and benefits to demand
a raise? Have manufacturers lost pricing power to global competitors? Has the
threat of reform tamed the excessive growth in healthcare costs? Will the new
fiscal conservatism prevail in Congress? Finally, will these factors continue to
dampen inflationary pressures; or, are they temporary in nature?
A Preemptive Move
Chairman Greenspan and the Federal Reserve Board (the "Fed") grappled with these
issues over the last year. Their dilemma - although economic statistics still
indicated benign inflation, economic growth has been vibrant. After concluding
it was too risky to wait for inflation to accelerate, the Fed raised the federal
funds rate on March 25 by .25% to 5.50%. This was the first increase since
February 1995. Inflation won't have a free ride on their watch! As the adage
goes, the Fed's job is to remove the punch bowl just before the party really
gets going. I believe the Fed hopes that a preemptive rate increase now would
slow the economy, restrain inflation, and eliminate the need for a more forceful
response later.
Portfolio Strategy
What should investors do? For many investors, a diversified portfolio of stocks,
bonds, and cash equivalents (money market or short-term bond funds) gives them
the confidence to endure the bumps in the road. As I have said in the past, no
one has yet proven that they can consistently predict the future of interest
rates. Rather than chasing the market, I follow a strategy of generating maximum
tax-exempt income that potentially should produce the best after-tax total
return over a 3-5 year investment horizon. Since I tend to focus on maturities
20 years or longer, this Fund will generally be more volatile than a fund with a
shorter average maturity. Potentially, investors should be rewarded over time
with higher tax-free income and the volatility, both up and down, typically
evens out.
The following table demonstrates that the tax-free dividend return is the
largest component of total return which we believe is the primary rationale for
owning a tax-exempt fund. Notice that over increasingly longer investment
horizons, price volatility generally has a diminishing impact on total return.
In the graphs below, notice again the significance of dividend return to total
return and that annual price changes sometime offset one another - but only over
multi-year investment horizons!
Average Annual Compounded Returns
With Reinvestment of Dividends - Periods Ending March 31, 1997
Total Dividend Price
Returns Equals Return Plus Change
Since
8/1/89 7.32% = 6.29% + 1.03%
5 Years 7.06% = 5.97% + 1.09%
1 Year 6.60% = 5.93% + .67%
A graph is located here showing the annual total returns of the USAA
California Bond Fund for the 7-year period ended March 31, 1997.
The values are:
1991 1992 1993 1994 1995 1996 1997
9.46 9.52 12.56 0.31% 6.89% 9.35% 6.60
A graph is located here showing the compounded dividend returns of the USAA
California Bond Fund for the 7-year period ended March 31, 1997. the
values are:
1991 1992 1993 1994 1995 1996 1997
7.10 6.81 6.51 5.15 6.19 6.08 5.93
A graph is located here showing the change in share price of the USAA
California Bond Fund for the 7-year period ended March 31, 1997. The
values are:
1991 1992 1993 1994 1995 1996 1997
2.36 2.71 6.05 -4.84 0.70 3.27 0.67
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions. Dividend return is
the income dividends received over the period assuming reinvestment of all
dividends. Share price change is the change in net asset value over the period
adjusted for capital gain distributions. No adjustment has been made for taxes
payable by shareholders on their reinvested dividends and capital gain
distributions. The performance data quoted represent past performance and are
not an indication of future results. Investment return and principal value of an
investment will fluctuate, and an investor's shares, when redeemed, may be worth
more or less than their original cost.
Focus on Healthcare
You may notice that healthcare-related bonds are the largest "industry" segment
for this Fund. I actively seek healthcare providers with certain credit
characteristics. Typically, they yield more because of the uncertainty of
healthcare reform and excess capacity in some markets. I believe we have picked
the winners. Healthcare has been and will continue to be an essential service.
Those providers with dominant market share, solidly profitable operations, and
talented management will not just survive, but thrive in a more competitive
environment.
Bond Selection
You may be interested to know what isn't in the Fund. The Fund currently owns no
lease revenue bonds that rely upon a local municipality, such as a city or
county, to appropriate annually the debt service from their General Fund. Unless
extenuating circumstances exist, an analyst cannot confidently predict debt
service payments that depend upon the actions of an elected governmental body
five or ten years into the future.
Since considerable public controversy typically embroils sports stadium
financing, I tend to avoid these bonds also. As I have said before, I do not buy
exotic derivatives, futures contracts, or bonds subject to the alternative
minimum tax (AMT).
Interest Rates
Interest rates on the 30-year U.S. Treasury Bond(1) (the "Long Bond") began the
reporting period at 6.67% on March 29, 1996. Over the next seven months, rates
traded nervously in a choppy range from 6.60% to 7.19%, falling to a fiscal year
low of 6.35% in November 1996. In December, Long Bond rates began an upward
trend closing the year at 7.10% on March 31, 1997. The yield on the Bond Buyer
40-Bond Index (BBI40), the industry standard for long-term, investment-grade
municipal bonds, behaved similarly. The BBI40 began the one-year period at 5.96%
on March 29, 1996, but closed slightly lower at 5.95% on March 31, 1997.
Your Fund's Performance
Your Fund's net asset value per share increased by $.07, or .67%, since March
31, 1996. The Fund's performance compared very favorably to its peer group.
While past performance is no guarantee of future results, the Fund's dividend
distribution yield(2) for the past 12 months was 5.77%, as compared to
Lipper's California Municipal Debt Funds average of 5.05% for the 99
funds in the category.(3) For the same period, the Fund's total return(4) was
6.60%, compared to the Lipper average of 5.23%.
(1) The 30-year Treasury Bond is generally considered the benchmark for long-
term interest rates in the U.S.
(2) 12-month dividend yield is computed by dividing income dividends paid
during the previous 12 months by the latest month-end net asset value
adjusted for capital gains distributions.
(3) Lipper Analytical Services is an independent organization that monitors
the performance of mutual funds.
(4) Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions.
A graph is located here comparing the 12-month dividend yield of the USAA
California Bond Fund and the Lipper California Municipal Debt Funds Average
from 3/31/91 to 3/31/97. The vertical axis shows the yield and the
horizontal axis shows the time period.
The values are:
USAA Calif.
Bond Fund 6.60 6.40 5.80 5.80 5.80 5.70 5.80
Lipper. Calif.
Muni. Debt
Funds Avg. 6.60 6.40 5.70 5.70 5.50 5.20 5.10
The Lipper California Municipal Debt Funds Average is computed by Lipper
Analytical Services, an independent organization that monitors the performance
of mutual funds. 12-month dividend yield is computed by dividing income
dividends paid during the previous 12 months by the latest month-end net asset
value adjusted for capital gains distributions. The graph represents data from
3/31/91 to 3/31/97.
The State of California
After a severe recession, California's diverse economy has been steadily
recovering since 1994. The State eliminated its accumulated general fund deficit
in fiscal year 1995-96 after peaking at $3.31 billion in June 1992. Reflecting
this improved financial performance, the State received two credit rating
upgrades in 1996. Fitch Investor's Service upgraded the State's general
obligation bond rating to "A+" in February 1996 and Standard & Poor's followed
with an "A+" in July. Moody's maintained their "A1."
The current economic outlook remains bright. California's unemployment rate
declined significantly to 6.8% in January 1997 from 7.6% a year earlier.
However, the State still lags the nation's rate of 5.4% as of January 1997.
While finances have improved with the economic upturn, fiscal and structural
pressures complicate the State's effort to maintain a balanced budget. Revised
fiscal 1997 estimates now project a modest operating deficit of $38 million,
down from an original projection of a $392 million surplus.
We closely monitor statewide ballot initiatives because of their potential
impact on our holdings. Partly because we have avoided lease revenue bonds in
the past, we own no securities that are directly vulnerable to Proposition 218,
commonly known as the "Right to Vote on Taxes Act."
The table below compares the yield of the USAA California Bond Fund with a
taxable equivalent investment.
To Match the California Bond Fund's Closing 30-Day SEC Yield of 5.49% and:
Assuming a California State Tax Rate of:
8.00% 9.30% 9.30% 9.30%
And a Marginal Federal Tax Rate of:
28% 31% 36% 39.6%
A Fully Taxable Investment Must Pay: 8.29% 8.77% 9.46% 10.02%
This table is based on a hypothetical investment calculated for illustrative
purposes only. It is not an indication of performance for any of the USAA
Family of Funds.
A pie chart is shown here depicting the Portfolio Ratings/Mix as of March 31,
1997 for the California Bond Fund to be:
AAA - 27%, AA - 17%, A - 28%, BBB - 26% and Cash Equivalents - 2%.
This chart reflects the highest rating of either Moody's Investors Service,
Standard & Poor's Rating Group, or Fitch Investors Service. Unrated securities
that have been determined by USAA IMCO to be of equivalent investment quality to
categories AAA and BBB account for 2.0% and .6% respectively, of the Fund's
investments.
Note: Income may be subject to federal, state or local taxes, or the alternative
minimum tax.
See page 16 for a complete listing of the Portfolio of Investments in
Securities.
Investment Review
CALIFORNIA MONEY MARKET FUND
OBJECTIVE: Provide California investors with a high level of current interest
income that is exempt from federal and California state income taxes, while
preserving capital and maintaining liquidity.
TYPES OF INVESTMENTS: High quality California tax-exempt securities with
maturities of 397 days or less. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less and will endeavor to maintain a constant
net asset value per share of $1.00.*
* An investment in this Fund is neither insured nor guaranteed by the U.S.
government, and there can be no assurance that the Fund will maintain a stable
net asset value of $1.00 per share.
3/31/96 3/31/97
Net Assets............................. $296.3 Million $341.1 Million
Net Asset Value Per Share.............. $1.00 $1.00
Average Annual Total Returns as of 3/31/97
1 Year.............................................................. 3.23%
5 Years............................................................. 2.93%
Since inception on August 1, 1989................................... 3.62%
7-Day Simple Yield on March 31, 1997................................ 3.11%
A graph is shown here comparing the 7-day yield of the USAA California Money
Market Fund and the IBC/Donoghue's State Specific SB & GP (Tax-Free):
California from 3/96 to 3/97. The vertical axis shows the yield and the
horizontal axis shows the time period. The ending value, on 3/25/97, for the
USAA California Money Market Fund is 3.01% and the ending value for the
IBC Donoghue's State Specific SB & GP (Tax-Free): California is 2.63%.
Total return equals income return and assumes reinvestment of all dividends and
any capital gain distributions. No adjustment has been made for taxes payable by
shareholders on their reinvested dividends and capital gain distributions. Past
performance is no guarantee of future results and the value of your investment
may vary according to the Fund's performance. The graph tracks the Fund's 7-day
simple yield against IBC/Donoghue's State Specific SB (Stock Broker) & GP
(General Purpose) (Tax-Free): California Money Funds, an average of all major
money market fund yields.
Message from the Manager
[A photograph of John C. Bonnell, CFA appears here]
Interest Rates
The short-term debt markets are heavily influenced by actions taken, or not
taken by the Federal Reserve (the Fed). After lowering the federal funds rate
(the rate banks charge each other for overnight loans) .25% on January 31, 1996,
the Fed maintained a stable policy for the remainder of 1996. However, an
exceptionally strong jobs report in February 1996 was the first of many signs
that the economy was growing much faster than originally anticipated. These
strong economic indicators and statistics were perceived by many to have the
potential of producing inflation. On March 25, 1997, the Fed announced it was
increasing the federal funds rate .25% in an attempt to prevent inflation before
it became a problem. It is still unclear (as it always is) whether this will be
a single move, or one of a series of rate hikes. The volatility in short-term
rates is illustrated by the one-year Treasury bill rate which increased more
than 1.0% between February and July 1996, before falling approximately .5% by
the end of 1996. The first quarter of 1997 brought higher rates once again with
the one-year Treasury bill increasing .5% to end the quarter at 6.0%, the
highest since May 22, 1995.
Strategy
We strive to meet the Fund's objective in any prevailing interest rate
environment. This is done in part by maintaining a mix of fixed rate securities
and variable rate securities in the Fund. Fixed rate securities lock in rates
for a given period of time, and help stabilize the Fund's yield during the
periods when there is a large amount of cash in the market relative to supply.
Variable rate securities pay interest that adjusts periodically to prevailing
market conditions, and also provide liquidity necessary to take advantage of
higher yielding securities when opportunities arise. Maintaining an appropriate
mix of different types of securities and conducting internal credit research
combine to provide a highly competitive return. As part of our stringent
selection criteria, we strive to ensure all purchases are the best relative
value in the market at any given time.
Performance
While past performance is no guarantee of future results, for the 12 months
ending March 31, 1997, your Fund ranked 2 out of 43 California Money Market
Funds according to IBC Financial Data, Inc.(1) The Fund's compounded
dividend yield was 3.23%, while the average for the category over the same
time period was 2.85%.
(1) IBC Financial Data, Inc. provides independent analyses of trends in the
financial services and investing industries, with particular concentration
on money market funds.
California
After suffering a severe recession, California's broad and diverse economy has
been on a steady recovery since early 1994. Financial results benefited from
this improvement as evidenced by the State's elimination of its accumulated
General Fund deficit in fiscal 1995-96. Reflecting this, the state received two
bond rating upgrades in 1996. Fitch Investor's Service upgraded the State's
general obligation bond rating to "A+" from "A" in February 1996, and S&P
upgraded to "A+" from "A" in July 1996. The current economic outlook remains
good. According to the Bureau of Labor Statistics, California's seasonally
adjusted unemployment rate improved to 6.8% in January 1997 from 7.6% in January
1996. While finances have improved with the cyclical economic upturn, fiscal and
structural pressures continue to hinder state efforts to maintain financial
stability. Revised fiscal 1997 estimates now project a modest deficit of $38
million, down from an original budget projection of a $392 million operating
surplus. We continue to closely monitor not only financial issues, but also
various legislative actions that may ultimately have an impact on the relative
attractiveness of California municipal securities. As always, we analyze each
issue on a case by case basis and remain very selective when investing fund
assets.
A graph is here showing the growth of $10,000, from 8/1/89 to 3/31/97, invested
in the USAA California Money Market Fund. The vertical axis shows the dollar
amount and the horizontal axis shows the time period. The ending value is
$13,140.
Past performance is no guarantee of future results and the value of your
investment may vary according to the Fund's performance. Income may be subject
to federal, state or local taxes, or to the alternative minimum tax.
An investment in this Fund is neither insured nor guaranteed by the U.S.
government and there is no assurance that the Fund will maintain a stable net
asset value of $1 per share.
See page 20 for a complete listing of the Portfolio of Investments in
Securities.
Independent Auditors' Report
The Shareholders and Board of Directors
USAA Tax Exempt Fund, Inc.:
We have audited the accompanying statements of assets and liabilities and
portfolios of investments in securities of the California Bond and California
Money Market Funds, separate Funds of USAA Tax Exempt Fund, Inc., as of March
31, 1997, the related statements of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights information presented in note 7 to the
financial statements for each of the years in the five-year period then ended.
These financial statements and the financial highlights information are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights information
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of March 31, 1997, by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights information
referred to above present fairly, in all material respects, the financial
position of the California Bond and California Money Market Funds, separate
Funds of USAA Tax Exempt Fund, Inc., as of March 31, 1997, the results of their
operations for the year then ended, the changes in their net assets for each of
the years in the two-year period then ended, and the financial highlights
information for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
May 9, 1997
<TABLE>
Statements of Assets and Liabilities
(In Thousands)
March 31, 1997
<CAPTION>
California
California Money Market
Bond Fund Fund
--------- ----
<S> <C> <C>
Assets
Investments in securities, at market value
(identified cost of $427,394 and $337,501, respectively) $ 444,415 $ 337,501
Cash 625 2,272
Receivables:
Capital shares sold 37 645
Interest 7,048 3,160
--------- ----------
Total assets 452,125 343,578
--------- ----------
Liabilities
Securities purchased 10,186 -
Capital shares redeemed 877 2,214
USAA Investment Management Company 120 92
USAA Transfer Agency Company 18 16
Accounts payable and accrued expenses 55 70
Dividends on capital shares 638 58
--------- ----------
Total liabilities 11,894 2,450
--------- ----------
Net assets applicable to capital shares outstanding $ 440,231 $ 341,128
========= ==========
Represented by:
Paid-in capital $ 427,221 $ 341,128
Accumulated net realized loss on investments (4,011) -
Net unrealized appreciation of investments 17,021 -
--------- ----------
Net assets applicable to capital shares outstanding $ 440,231 $ 341,128
========= ==========
Capital shares outstanding 41,926 341,128
========= ==========
Net asset value, redemption price, and offering price per share $ 10.50 $ 1.00
========= ==========
</TABLE>
See accompanying notes to financial statements.
Categories & Definitions
Portfolios of Investments in Securities
March 31, 1997
Fixed Rate Instruments - consist of municipal bonds, notes, and commercial
paper. The interest rate is constant to maturity. Prior to maturity, the price
of a fixed rate instrument generally varies inversely to the movement of
interest rates.
Put Bonds - provide the right to sell the bond at face value at specific tender
dates prior to final maturity. The put feature shortens the effective maturity
to the next tender date.
Variable Rate Demand Notes (VRDN) - provide the right, on any business day, to
sell the security at face value on either that day or in seven days. The
interest rate is adjusted at a stipulated daily, weekly, or monthly interval to
a rate that reflects current market conditions. In money market funds, the
effective maturity is the date on which the underlying principal amount may be
recovered or the next rate adjustment date consistent with regulatory
requirements. In bond funds, the effective maturity is the next put date. Most
VRDNs possess a credit enhancement.
Credit Enhancement (CRE) - adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal when due. The
enhancement may be provided by either a high quality bank, insurance company, or
other corporation, or a collateral trust. Typically, the rating agencies
evaluate the security based upon the credit standing of the provider of the
credit enhancement, rather than the credit standing of the issuer.
<TABLE>
California Bond Fund
Portfolio of Investments in Securities
(In Thousands)
March 31, 1997
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
------ -------- ---- -------- -----
Fixed Rate Instruments (98.7%)
<C> <S> <C> <C> <C>
California (93.1%)
$ 5,225 Alameda Housing Auth. MFH RB, Series 1989A 7.50 % 2/20/31 $ 5,350
Anaheim Public Financing Auth. RB,
15,865 Series 1997C (CRE) 5.98 (d) 9/01/23 3,204
14,385 Series 1997C (CRE) 6.00 (d) 9/01/24 2,734
30,000 Central Valley Cogeneration Financing Auth. RB 6.20 7/01/20 30,016 (c)
7,175 Contra Costa Water District RB, Series D (CRE) 6.38 10/01/22 7,467
11,000 Department of Water Resources RB, Series K 6.00 12/01/21 10,985
5,000 Desert Hospital District COP (CRE) 6.39 7/28/20 5,129
Educational Facilities Auth. RB,
9,500 Series 1991 (CRE) 7.15 5/01/21(a) 10,537
5,000 Series 1992 6.00 2/15/17 5,025
1,775 Series 1992 6.88 9/01/22 1,867
8,990 Series 1992 6.50 10/01/22 9,225
9,000 Series 1994 (CRE) 6.20 5/01/21 9,181
8,015 Series 1995 6.00 10/01/25 7,844
8,050 Series 1995A 5.60 12/01/20 7,548
2,435 Fresno COP 8.50 5/01/16 2,496
Health Facilities Financing Auth. RB,
8,000 Series 1990 7.50 10/01/10(a) 8,869
6,500 Series 1990A (CRE) 7.70 9/01/10 7,076
35,000 Series 1990A 6.50 12/01/20 36,749
11,500 Series 1991 (CRE) 6.75 6/01/21 11,956
3,175 Series 1992A (CRE) 6.38 10/01/22 3,304
2,000 Series 1994 (CRE) 6.50 9/01/14 2,064
5,000 Series 1994A 6.63 7/01/18 5,240
4,180 Hollister Joint Powers Financing Auth. RB 5.90 12/01/23 3,894
Housing Finance Agency Home Mortgage RB,
960 Series 1988F 7.88 8/01/19 990
10,310 Series 1991F 6.85 8/01/17 10,765
5,990 Series 1994A 6.55 8/01/26 6,200
3,000 Housing Finance Agency MFH RB,
Series 1996A (CRE) 6.05 8/01/27 3,007
5,455 Imperial Beach MFH RB, Series 1995A 6.45 9/01/25 5,587
5,000 Metropolitan Water District RB 5.50 7/01/19 4,689
12,000 Modesto Irrigation District RB,
Series 1992A (CRE) 6.13 9/01/19 12,231
3,000 Mojave Water Agency Improvement District GO 6.60 9/01/22(a) 3,311
10,975 New Haven Unified School District GO,
Series 1997A (CRE) 6.10 (d) 8/01/21 2,456
11,100 Pleasanton Joint Powers Financing Auth. RB,
Series 1993A 6.15 9/02/12 11,150
Sacramento Cogeneration Auth. RB,
3,700 Series 1995 5.88 7/01/15 3,577
6,500 Series 1995 6.50 7/01/21 6,621
6,000 Series 1995 6.00 7/01/22 5,773
6,130 Sacramento Municipal Utility District
Electric RB, Series 1987R 6.00 2/01/15 6,044
7,040 San Diego MFH RB, Series 1995A 6.45 5/01/25 7,191
13,500 San Joaquin Hills Transportation Corridor
Agency Senior Lien RB 6.75 1/01/32 14,033
32,035 San Joaquin Hills Transportation Corridor
Agency Senior Lien RB 5.00 1/01/33 26,531
11,320 San Mateo Sewer RB, Series 1992 (CRE) 6.30 8/01/17 11,790
12,455 Southern California Public Power Auth. RB,
Series 1989 (CRE) 6.00 7/01/18 12,424
Statewide Communities Development Auth. COP,
13,500 Huntington Memorial Hospital (CRE) 5.80 7/01/26 13,129
5,420 Lutheran Homes (CRE) 5.75 11/15/21 5,206
4,000 Series 1996A (CRE) 5.50 9/01/14 3,777
Univ. of California RB,
12,000 Series 1991A 6.88 9/01/16(a) 13,372
4,000 Series 1996 (CRE) 5.75 7/01/24 3,892
Washington Township Hospital RB,
7,000 Series 1993 5.50 7/01/18 6,471
6,070 Series 1993 5.25 7/01/23 5,334
Watsonville Insured Hospital RB,
5,000 Series 1995A (CRE) 6.35 7/01/24 5,113
1,515 Series 1996A (CRE) 6.20 7/01/12 1,552
Puerto Rico (5.6%)
Electric Power Auth. RB,
10,000 Series X 6.13 7/01/21 10,094
2,200 Series X 5.50 7/01/25 2,045
13,200 Highway and Transportation Auth. RB,
Series 1996Y 5.50 7/01/36 12,300
- --------------------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $417,394) 434,415
- --------------------------------------------------------------------------------------------------------
Variable Rate Demand Notes (2.3%)
California
6,600 Fontana COP, Series 1991 (CRE) 4.10 7/01/21 6,600
1,400 Pollution Control Financing Auth. PCRB,
Series 1996F (CRE) 3.75 11/01/26 1,400
Statewide Communities Development Auth. COP,
400 Series 1993 3.40 7/01/08 400
1,600 Series 1996 (CRE) 3.70 6/01/26 1,600
- --------------------------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $10,000) 10,000
- --------------------------------------------------------------------------------------------------------
Total investments (cost: $427,394) $ 444,415
========================================================================================================
</TABLE>
Portfolio Summary By Industry
-----------------------------
Hospitals 20.9 %
Electric Power 17.7
Education 9.2
Toll Roads 9.2
Escrowed Securities 8.2
Water Utilities 8.0
Special Assessment/Tax/Fee 6.7
Multi-Family Housing 4.8
Single-Family Housing 4.1
Sewer 3.6
Nursing Care 2.7
Retirement Homes 2.0
Buildings 1.5
Healthcare - Miscellaneous 1.2
Community Service .6
General Obligations .6
-----
Total 101.0 %
=====
<TABLE>
California Money Market Fund
Portfolio of Investments in Securities
(In Thousands)
March 31, 1997
<CAPTION>
Principal Coupon Final
Amount Security Rate Maturity Value
------ -------- ---- -------- -----
Variable Rate Demand Notes (62.4%)
<C> <S> <C> <C> <C>
California
$ 1,500 ABAG Finance Auth. COP (CRE) 3.25 % 9/01/22 $ 1,500
2,850 Agoura Hills MFH RB, Series 1995 (CRE) 3.60 6/01/15 2,850
5,100 Auburn Union School District COP,
Series 1993 (CRE) 3.50 12/01/21 5,100
4,000 Central Unified School District COP,
Series 1995 (CRE) 3.65 6/01/15 4,000
9,700 Corona MFH RB, Series 1985B (CRE) 3.53 2/01/05 9,700 (b)
5,180 Covina Redevelopment Agency MFH RB,
Series 1994A (CRE) 3.65 12/01/15 5,180
5,100 Economic Development Financing Auth. RB,
Series 1996 (CRE) 3.40 11/15/26 5,100
4,290 Educational Facilities Auth. RB,
Series 1997 (CRE) 3.60 3/01/27 4,290
Foothill/Eastern Transportation Corridor
Agency RB,
2,200 Series 1995D (CRE) 3.30 1/02/35 2,200
5,900 Series 1995E (CRE) 3.25 1/02/35 5,900
4,470 Gardena Financing Agency RB,
Series 1991 (CRE) 3.55 9/01/11 4,470
3,545 Grand Terrace MFH RB, Series 1985A (CRE) 3.55 12/01/11 3,545
1,210 Healdsburg Community Redevelopment
Agency RB, Series 1993A (CRE) 3.55 1/01/98 1,210
4,900 Huntington Beach MFH RB, Series 1985A (CRE) 4.00 2/01/10 4,900
15,000 Kern Community College District COP,
Series 1995 (CRE) 3.95 1/01/25 15,000
10,700 Lancaster MFH RB, Series 1984A (CRE) 3.50 11/01/04 10,700 (b)
2,115 Lemoore COP, Series 1995 (CRE) 3.55 11/01/20 2,115
7,000 Loma Linda Water RB, Series 1995 (CRE) 3.65 6/01/25 7,000
3,000 Los Angeles Community Redevelopment Agency
MFH RB, Series 1985 (CRE) 3.40 12/01/05 3,000
1,950 Madera Public Financing Auth. RB,
Series 1993 (CRE) 3.55 11/01/23 1,950
400 Merced IDA RB, Series 1989 (CRE) 3.50 12/01/97 400
4,400 Monrovia Redevelopment Agency COP,
Series 1984 (CRE) 3.65 12/01/14 4,400
Orange County Apartment Development RB,
8,100 Series 1984D (CRE) 3.53 8/01/19 8,100
14,450 Series 1992B (CRE) 3.55 11/01/05 14,450
2,645 Porterville Union High School District COP,
Series 1994 (CRE) 3.50 5/01/19 2,645
3,180 Riverside County Housing Auth. MFH RB,
Series 1986F (CRE) 3.25 12/01/16 3,180
2,750 Riverside MFH RB, Series 1985E (CRE) 3.55 5/01/05 2,750 (b)
1,900 Roseville Finance Auth. RB, Series 1989A (CRE) 3.25 10/01/14 1,900
3,100 Sacramento County MFH RB, Series 1985E (CRE) 3.45 9/15/07 3,100
5,000 San Bernardino County COP, Series 1996 (CRE) 3.70 11/01/25 5,000
San Bernardino County MFH RB,
3,850 Series 1985A (CRE) 3.55 6/01/05 3,850 (b)
1,500 Series 1985B (CRE) 3.53 6/01/05 1,500 (b)
5,075 San Bernardino IDA RB, Series 1992 (CRE) 3.55 2/01/12 5,075
8,300 San Diego MFH RB, Series 1993A (CRE) 3.55 12/01/15 8,300
7,510 Statewide Communities Development Auth. RB,
Series 1995D (CRE) 3.60 12/01/22 7,510
Statewide Communities Development Auth. COP,
2,200 Covenant Retirement Communities,
Series 1992 (CRE) 3.35 12/01/22 2,200
3,925 Institute for Defense Analysis,
Series 1992 (CRE) 3.50 11/01/22 3,925
10,100 Retired Officers Community, Series 1996 (CRE) 3.70 6/01/26 10,100
4,900 St. Joseph Health System, Series 1993 3.40 7/01/08 4,900
20,000 Torrance Hospital RB, Series 1992 (CRE) 3.40 2/01/22 20,000
- --------------------------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $212,995) 212,995
- --------------------------------------------------------------------------------------------------------
Put Bonds (6.0%)
California
Pollution Control Financing Auth. PCRB,
2,660 Series 1984 3.70 5/15/02 2,660
5,260 Series 1984B 3.70 6/15/05 5,260
12,700 Public Capital Improvement Finance Auth. RB,
Series 1988C (CRE) 3.55 6/01/28 12,700
- --------------------------------------------------------------------------------------------------------
Total put bonds (cost: $20,620) 20,620
- --------------------------------------------------------------------------------------------------------
Fixed Rate Instruments (30.5%)
California (29.5%)
5,000 Contra Costa Community College District TRAN,
Series 1996 4.50 6/30/97 5,008
11,150 East Bay Municipal Utility District CP 3.40 5/23/97 11,150
6,500 GO RAN, Series 1996-97A 4.50 6/30/97 6,513
4,000 Hesperia Unified School District TRAN,
Series 1996 4.25 6/30/97 4,004
2,050 Lafayette Elementary School District TRAN,
Series 1996 4.25 10/09/97 2,054
8,500 Long Beach GO TRAN, Series 1996-97 4.75 10/09/97 8,532
10,000 Los Angeles County GO TRAN,
Series 1996A (CRE) 4.50 6/30/97 10,016
4,200 North County Schools Financing Auth. TRAN,
Series 1996 4.75 7/01/97 4,206
3,000 Rialto Unified School District TRAN, Series 1996 4.50 7/11/97 3,005
Riverside County Transportation Commission,
2,000 CP Notes (CRE) 3.45 5/01/97 2,000
2,250 CP Notes (CRE) 3.40 5/01/97 2,250
5,050 Sacramento County GO TRAN, Series 1996 4.50 9/30/97 5,068
500 Saddleback Valley Unified School District RB,
Series 1996A (CRE) 4.60 9/01/97 502
2,700 San Diego County Teeter Plan CP Notes,
Series 1996B (CRE) 3.25 5/13/97 2,700
6,500 San Jose Unified School District TRAN,
Series 1996 4.50 8/05/97 6,512
14,775 San Ramon Valley Unified School District TRAN,
Series 1996-97 4.30 % 10/30/97 14,808
7,530 Santa Cruz County Teeter Plan TRAN,
Series 1995-96 (CRE) 4.50 6/26/97 7,539
4,500 Yuba Community College District TRAN,
Series 1996-97 4.50 10/31/97 4,519
Puerto Rico (1.0%)
3,500 Government Development Bank CP 3.30 4/03/97 3,500
- -------------------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $103,886) 103,886
- -------------------------------------------------------------------------------------------------------
Total investments (cost: $337,501) $ 337,501
=======================================================================================================
</TABLE>
Portfolio Summary By Industry
-----------------------------
Multi-Family Housing 24.8 %
Education 20.2
General Obligations 8.8
Hospitals 7.9
Retirement Homes 5.3
Water Utilities 5.3
Special Assessment/Tax/Fee 4.6
Finance - Municipal 4.5
Buildings 3.1
Hotel/Motel 2.8
Toll Roads 2.4
Oil - International 2.3
Sales Tax Obligations 1.3
Leisure Time 1.2
Specialized Services 1.2
Bank Holding Companies - Other Major 1.0
Other 2.2
----
Total 98.9 %
====
Notes to Portfolios of Investments in Securities
March 31, 1997
General Notes
Values of securities are determined by procedures and practices discussed in
note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
Portfolio Description Abbreviations
COP Certificate of Participation
CP Commercial Paper
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development Authority/Agency
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RAN Revenue Anticipation Note
RB Revenue Bond
TRAN Tax Revenue Anticipation Note
Specific Notes
(a) Prerefunded to various dates prior to maturity at the call price.
(b) These securities were purchased within the terms of a private placement
memorandum and are subject to a seven day demand feature. Under
procedures adopted by the Board of Directors, the Manager has determined
that these securities are liquid. At March 31, 1997, these securities
represented 8.4% of the California Money Market Fund's net assets.
(c) At March 31, 1997, the cost of securities purchased on a delayed delivery
basis for the California Bond Fund was $10,030,800.
(d) Zero Coupon security. Rate represents the effective yield at date of
purchase.
See accompanying notes to financial statements.
<TABLE>
Statements of Operations
(In Thousands)
Year ended March 31, 1997
<CAPTION>
California
California Money Market
Bond Fund Fund
--------- ----
<S> <C> <C>
Investment income:
Interest income $ 26,290 $ 11,404
--------- ---------
Expenses:
Management fees 1,367 1,005
Transfer agent's fees 233 201
Custodian's fees 90 99
Postage 18 26
Shareholder reporting fees 10 17
Directors' fees 4 4
Registration fees 3 17
Audit fees 22 22
Legal fees 6 6
Other 16 13
--------- ---------
Total expenses 1,769 1,410
--------- ---------
Net investment income 24,521 9,994
--------- ---------
Net realized and unrealized gain (loss) on investments:
Net realized gain 3,635 -
Change in net unrealized appreciation/depreciation (890) -
--------- ---------
Net realized and unrealized gain 2,745 -
--------- ---------
Increase in net assets resulting from operations $ 27,266 $ 9,994
========= =========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
Statements of Changes in Net Assets
(In Thousands)
Years ended March 31,
<CAPTION>
California California
Bond Fund Money Market Fund
--------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 24,521 $ 22,825 $ 9,994 $ 9,711
Net realized gain on investments 3,635 3,356 - -
Change in net unrealized appreciation/
depreciation of investments (890) 8,681 - -
---------- ---------- ---------- ----------
Increase in net assets resulting from
operations 27,266 34,862 9,994 9,711
---------- ---------- ---------- ----------
Distributions to shareholders from:
Net investment income (24,521) (22,825) (9,994) (9,711)
---------- ---------- ---------- ----------
From capital share transactions:
Proceeds from shares sold 66,664 64,140 371,516 262,179
Shares issued for dividends reinvested 16,992 16,097 9,315 8,964
Cost of shares redeemed (55,350) (55,971) (336,052) (241,558)
---------- ---------- ---------- ----------
Increase in net assets from
capital share transactions 28,306 24,266 44,779 29,585
---------- ---------- ---------- ----------
Net increase in net assets 31,051 36,303 44,779 29,585
Net assets:
Beginning of period 409,180 372,877 296,349 266,764
---------- ---------- ---------- ----------
End of period $ 440,231 $ 409,180 $ 341,128 $ 296,349
========== ========== ========== ==========
Change in shares outstanding:
Shares sold 6,327 6,158 371,516 262,179
Shares issued for dividends reinvested 1,610 1,543 9,315 8,964
Shares redeemed (5,255) (5,376) (336,052) (241,558)
--------- ---------- ---------- ----------
Increase in shares outstanding 2,682 2,325 44,779 29,585
========= ========== ========== ==========
Authorized shares of $.01 par value 50,000 50,000 425,000 425,000
========= ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
Notes to Financial Statements
March 31, 1997
(1) Summary of Significant Accounting Policies
USAA Tax Exempt Fund, Inc. (the Company), registered under the Investment
Company Act of 1940, as amended, is a diversified, open-end management
investment company incorporated under the laws of Maryland consisting of ten
separate funds. The information presented in this annual report pertains only to
the California Bond Fund and California Money Market Fund (the Funds). The Funds
have a common objective of providing California investors with a high level of
current interest income that is exempt from federal and California state income
taxes. The California Money Market Fund has a further objective of preserving
capital and maintaining liquidity.
A. Security valuation - Investments in the California Bond Fund are valued each
business day by a pricing service (the Service) approved by the Company's
Board of Directors. The Service uses the mean between quoted bid and asked
prices or the last sale price to price securities when, in the Service's
judgement, these prices are readily available and are representative of the
securities' market values. For many securities, such prices are not readily
available. The Service generally prices these securities based on methods which
include consideration of yields or prices of municipal securities of comparable
quality, coupon, maturity and type, indications as to values from dealers in
securities, and general market conditions. Securities which are not valued by
the Service, and all other assets, are valued in good faith at fair value using
methods determined by the Manager under the general supervision of the Board of
Directors. Securities purchased with maturities of 60 days or less and, pursuant
to Rule 2a-7 of the Investment Company Act of 1940, as amended, all securities
in the California Money Market Fund, are stated at amortized cost which
approximates market value.
B. Federal taxes - Each Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on
the date the securities are purchased or sold (trade date). Gain or loss from
sales of investment securities is computed on the identified cost basis.
Interest income is recorded daily on the accrual basis. Premiums and original
issue discounts are amortized over the life of the respective securities. Market
discounts are not amortized. Any ordinary income related to market discounts is
recognized upon disposition of the bonds. The Funds concentrate their
investments in California municipal securities and therefore may be exposed to
more credit risk than portfolios with a broader geographical diversification.
D. Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) Lines of Credit
The Funds participate with other USAA funds in two joint short-term
revolving loan agreements totaling $850 million through January 13, 1998, one
with USAA Capital Corporation (CAPCO), an affiliate of the Manager ($750 million
uncommitted), and one with an unaffiliated bank ($100 million committed). The
purpose of the agreements is to meet temporary or emergency cash needs,
including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability under these agreements, each
Fund may borrow up to a maximum of 15% of its total assets, of which only 5% may
be borrowed from CAPCO, at the lending institution's borrowing rate plus a
markup. The Funds had no borrowings under either of these agreements during the
year ended March 31, 1997.
(3) Distributions
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. All net investment income available for distribution was
distributed at March 31, 1997.
Distributions of realized gains from security transactions not offset by
capital losses are made in the succeeding fiscal year or as otherwise required
to avoid the payment of federal taxes. At March 31, 1997, the California Bond
Fund had capital loss carryovers for federal income tax purposes of
approximately $4,011,000 which, if not offset by subsequent capital gains will
expire in 2003. It is unlikely that the Board of Directors of the Company will
authorize a distribution of capital gains realized in the future until the
capital loss carryovers have been utilized or expire.
The Funds completed their fiscal year on March 31, 1997. Federal law
(Internal Revenue Code of 1986, as amended, and the regulations thereunder)
requires each Fund to notify its shareholders after the close of its taxable
year as to what portion of its earnings was exempt from federal taxation and
dividend distributions which represent long-term capital gains. The net
investment income earned and distributed by each of the Funds was 100% tax
exempt for federal and California state income tax purposes. There were no
long-term capital gain distributions for the year ended March 31, 1997.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term
securities, for the year ended March 31, 1997 for the California Bond Fund were
$128,876,786 and $99,801,972, respectively. Purchases and sales/maturities of
securities for the year ended March 31, 1997 for the California Money Market
Fund were $1,056,319,237 and $1,011,645,900, respectively.
Gross unrealized appreciation and depreciation of investments at March 31,
1997 for the California Bond Fund was $18,242,839 and $1,221,587, respectively.
(5) Transactions with Manager
A. Management fees - The investment policies of the Funds and the
management of the Funds' portfolios are carried out by USAA Investment
Management Company (the Manager). Management fees are computed as a percentage
of aggregate average net assets (ANA) of both Funds combined, which on an annual
basis is equal to .50% of the first $50,000,000, .40% of that portion over
$50,000,000 but not over $100,000,000, and .30% of that portion over
$100,000,000. These fees are allocated on a proportional basis to each Fund
monthly based upon ANA.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides transfer
agent services to the Funds based on an annual charge per shareholder account
plus out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Funds' shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
(6) Transactions with Affiliates
Certain directors and officers of the Funds are also directors, officers,
and/or employees of the Manager. None of the affiliated directors or Fund
officers received any compensation from the Funds.
<TABLE>
California Bond Fund
March 31, 1997
(7) Financial Highlights
Per share operating performance for a share outstanding throughout each
period is as follows:
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.43 $ 10.10 $ 10.03 $ 10.75 $ 10.25
Net investment income .61 .60 .59 .59 .62
Net realized and
unrealized gain (loss) .07 .33 .07 (.52) .62
Distributions from net
investment income (.61) (.60) (.59) (.59) (.62)
Distributions of realized
capital gains - - - (.20) (.12)
--------- --------- ---------- --------- ----------
Net asset value at
end of period $ 10.50 $ 10.43 $ 10.10 $ 10.03 $ 10.75
========= ========= ========== ========= ==========
Total return (%) * 6.60 9.35 6.89 .31 12.56
Net assets at end
of period (000) $ 440,231 $ 409,180 $ 372,877 $ 382,766 $ 386,933
Ratio of expenses to
average net assets (%) .41 .42 .44 .44 .46
Ratio of net investment
income to average
net assets (%) 5.74 5.74 5.98 5.40 5.94
Portfolio turnover (%) 23.72 23.09 28.86 102.85 86.53
</TABLE>
*Assumes reinvestment of all dividend income and capital gains
distributions during the period.
<TABLE>
California Money Market Fund
March 31, 1997
(7) Financial Highlights (continued)
Per share operating performance for a share outstanding throughout
each period is as follows:
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .04 .03 .02 .03
Distributions from net
investment income (.03) (.04) (.03) (.02) (.03)
--------- ---------- ---------- --------- ----------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========== ========== ========= ==========
Total return (%) * 3.23 3.58 2.94 2.22 2.66
Net assets at end
of period (000) $ 341,128 $ 296,349 $ 266,764 $ 247,303 $ 219,097
Ratio of expenses to
average net assets (%) .45 .47 .47 .49 .50
Ratio of net investment
income to average
net assets (%) 3.19 3.52 2.91 2.19 2.63
</TABLE>
*Assumes reinvestment of all dividend income distributions during the period.
